The mortgage financing contingency is one of the most common contingencies included within real estate purchase agreements or contracts. Essentially, these clauses give home buyers a way to back out of the deal if they are unable to secure a mortgage loan to complete the purchase. Here’s an overview of how mortgage financing contingencies work, along with an example clause.
What Is a Mortgage Contingency, Exactly?
Within the context of a real estate transaction, a contingency is something that must happen in order for the deal to move forward. The sale of the home can be contingent upon certain conditions or events. These necessary conditions are spelled out within the real estate contract (a.k.a. purchase agreement).
In a previous article, we looked at some of the most common contingencies used by home buyers. The mortgage financing contingency is one of the most commonly used clauses. It basically says that the sale of the home is contingent — or dependent — upon the buyer’s ability to get a loan.
Real estate purchase agreements are binding legal agreements made between the person selling the home, and the person(s) buying it. So it’s important for both parties to understand all of the clauses that are included within the contract. And in some cases, it’s wise for buyers to include certain contingencies within the purchase agreement to protect their interests. The mortgage loan contingency is one such example.
Sample Financing Clause in a Real Estate Contract
As far as the actual wording goes, financing contingencies can vary from state to state. Most states have a standard document known as the residential real estate purchase agreement (or something similar). These documents usually have a fill-in-the-blank section that pertains to the mortgage contingency, if the home buyer chooses to include one.
Here is a sample financing contingency from a purchase agreement:
“This contract is contingent on the ability of purchaser to secure or receive a commitment for the financing described above within 45 calendar days from the date of acceptance of this contract, which commitment or approval purchaser agrees to pursue diligently. If, after making every reasonable effort, the purchaser is unable to obtain the specific financing, and notifies seller of this fact in writing within the term of this contingency, this contract shall become null and void and purchaser’s deposit shall be refunded in full.”
Here are the most important parts of this sample mortgage contingency:
- Timeframe — In this example, the home buyers have given themselves 45 days to get a loan commitment from their lender. That’s 45 days from contract acceptance to the final loan commitment. After that time, this contingency will expire.
- Notification — This contract clause also stipulates that the home buyer must notify the seller in writing, if they are unable to secure financing.
- Refund — If the buyers do not get their loan, the contract becomes “null and void.” This means the buyers can back out of the deal without losing their earnest money deposit. The deposit would then be refunded, as stated in the example contract above.
In the above sample, the buyers gave themselves 45 days to get a loan commitment from their lender. But this is not a standard requirement. The number of days used for mortgage financing contingencies can vary, as explained below.
How Many Days Should You Aim for?
There is no official rule or law that says how long, or how many days, the mortgage contingency should remain active. It can vary from one real estate contract to the next. Usually, it’s up to the home buyer. But the seller must agree to it as well, so the number of days for the financing contingency will have to be acceptable to both parties.
On average, mortgage contingencies included within purchase agreements tend to range from 30 to 60 days. But again, it can vary. And it’s not binding until both parties agree to it in writing, with signatures on the contract. *
Beware of Contingencies in a Hot Housing Market
In most cases, it makes sense for home buyers to include a financing contingency within the real estate purchase agreement or contract. It prevents them from losing the earnest money deposit due to something that’s beyond their control.
But there are some scenarios where buyers should tread carefully. For instance, in a hot housing market where sellers tend to receive multiple competing offers, having too many contingencies could work against the buyer.
Related: The risks of waiving a contingency
Contracts (and the clauses and stipulations that go into them) are an important part of the purchase process. Buyers should carefully consider all of the components that go into the purchase agreement, and that includes any contingencies. When in doubt, ask your real estate agent for advice.
* Disclaimers: This article explains how mortgage contingencies work, and it includes generic language and details that might not apply to your specific situation. Real estate laws and requirements can vary from one state to the next. This article is meant for a general audience and does not constitute legal advice.
Brandon Cornett
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author